One of my mentors used to say to me that to be a good lawyer you needed to learn to skate backwards. The value of this metaphor is evident from the Divisional Court’s decision in Basegmez[i].
In Basegmez: 3 partners/shareholders invested in an hotel and condo project; 1 of them was responsible for day to day management; the other 2 commenced an oppression remedy proceeding against the managing shareholder; the judge found that the managing shareholder engaged in oppressive conduct by issuing shares to himself to gain voting control, causing the corporation to enter deals with corporations he controlled and used the corporation’s money for his own purposes and, as such, ordered that a liquidator be appointed and the corporation’s assets be sold as part of a winding up of the corporation as the applicable remedy for the oppression.
The managing shareholder appealed to the Divisional Court. The Divisional Court upheld the findings of oppressive conduct. With respect to the managing shareholder’s argument that the appointment of a liquidator and a winding up was over-kill, and that the judge should have ordered the managing partner to buy out the others at fair market value, the Divisional Court, in part, said:
[21] The appellants did not ask Lederman J. to order Mr. Akman to buy out the respondents’ shares at fair market value. Instead, they argued that the court should not interfere with the Akman`s control of Tarn. They did not address any process for separating the parties’ respective investments in the corporation. Lederman J. noted that he was faced “only with the choice of continuing the status quo or ordering that there be a winding up. No other option was provided by [the appellants]…”
[22] Mr. Hall argues forcefully that Lederman J. erred in principle by failing to consider a different outcome despite his clients’ tactical decision to leave a stark all-or-nothing choice to the judge below. It is not an error for the judge to fail to impose an outcome that the appellants never sought.
Therein lies the value of providing the court, ‘in the alternative’, with a practical common-sense remedial solution, that takes into consideration everyone’s interests, just in case your client loses on oppression. Be ready. Your client may lose on the question of oppression despite the confidence you and your client have in the case.
A good defence is as valuable as a good offence.
[i] Basegmez et al. v. Akman et al., 2018 ONSC 812
In 1975, I was 12 years old. My world was consumed with daydreaming of having the powers of Steve Austin, The Six Million Dollar Man. Every episode opened with “…we can rebuild him. We have the technology…better, stronger, faster”.
I had no idea, while daydreaming about having the powers of Steve Austin, that there existed a parallel commercial litigation world inhabited by legislators, lawyers, judges and litigants and that the Government of Canada was enacting the Canada Business Corporations Act (“CBCA”), which introduced the statutory corporate oppression remedy.
No 12-year old should be daydreaming about becoming a commercial litigation lawyer or preoccupied with legislative enactments. By that measure, I was a healthy, normal 12-year old living in the pre-video games/internet era relying mainly on television and my imagination for entertainment.
43 years later I find myself living in a (more mature but less exciting) world where I reflect upon the powers of the statutory oppression remedy instead of The Six Million Dollar Man. A “better, stronger, faster” remedy for addressing oppressive shareholder conduct.
When the oppression remedy was incorporated into the CBCA in 1975 it was intended to be a ‘game-changer’. It provided current and former shareholders, directors, and officers of a corporation, and any other “proper person”, in the eyes of the court, with the right to seek judicial intervention to fix any situation where the conduct of the corporation or its affiliates, or the powers of their respective directors, oppressed, was unfairly prejudicial to or unfairly disregarded the interests of any shareholder, creditor, director or officer. The court had maximum discretion to tailor on appropriate remedy in the circumstances by being granted the overall power to make “any interim or final order it thinks fit”.
In 1982 the Government of Ontario enacted the Business Corporations Act (“OBCA”) which largely resembled the CBCA, including the introduction of a provincial statutory oppression remedy. As a result, federal corporations operating in Ontario have been subject to the CBCA oppression remedy provisions since 1975 and Ontario provincial corporations have been subject to similar oppression remedy provisions since 1982. The only substantive difference between the federal and provincial oppression remedy provisions are that the provincial provisions are broader in that they also cover conduct or the exercise of power which threatens to be oppressive. In other words, the OBCA provisions expressly provide for judicial intervention to pre-empt threatened oppressive conduct.
A significant amount of oppression remedy case-law has developed in Ontario over the past 44 years. Since being professionally immersed in this provision since the start of my practice, the following are my high-level takeaways from the case-law on this remedy of maximum judicial discretion:
1. The oppression remedy has lived up to the initial anticipation of being a broadly-based discretionary remedy available to the court to fashion the most appropriate remedy to address corporate unfairness or injustice. It has resulted in aggrieved shareholders, directors, officers, and creditors/other proper persons being afforded an effective and powerful statutory remedy to rectify corporate unfairness and injustice. However, the court will be careful to tailor the relief so as not to do more than is necessary to remedy the oppressive conduct;
2. A settled two-part test has been established for judicial intervention. First, the evidence must establish a reasonable expectation which has been breached. The typical factors to be considered in determining the existence of a reasonable expectation are commercial practice, the nature of the corporation, relationships, past practice, preventative steps, representations and agreements, and the fair resolution of conflicting interests. The second part of the test requires a determination of whether the breached reasonable expectation amounts to oppression, unfair prejudice, or unfair disregard for the interests of the complaining party. To get from the first step, to the second step, the complaining party needs to suffer harm or prejudicial consequences—that is what takes the matter from a breached reasonable expectation to actionable oppressive conduct;
3. The oppression remedy has wider application or relevancy in smaller closely-held corporations. There is a wider range of reasonable expectations, and thus the potential for breaches thereof amounting to oppression, in small closely-held corporations than in large publicly-traded corporations. This is because it is not uncommon in small closely-held corporations for shareholders also to be directors and officers playing a role in managing the business, or otherwise to feel entitled to a ‘say’ in how the corporation is managed or the direction it takes, and, thus, more potential for diverging and conflicting interests;
4. The application of the oppression remedy test is largely fact sensitive—context matters. Whether a court will intervene, and what remedy it will fashion, largely depends on the facts of the case as determined by the presiding court. As such, marshalling and mastering the facts and evidence in an oppression remedy case is essential; and
5. Directors may have personal liability for corporate oppressive conduct. The risk of personal exposure should provide directors with sufficient incentive to manage the business and affairs of a corporation in such a way as to honour the reasonable expectations of shareholders, other directors, officers and creditors impacted by the conduct of the corporation.
There are two important parts to proving or defending against an oppression remedy claim on behalf of a client. First, the lawyer needs to understand the oppression remedy legal framework. Second, the lawyer needs to have a mastery of the relevant facts and evidence. Just like the Six Million Dollar Man, every case needs to be rebuilt and analysed from the ground up.
This post also appeared in the February issue of The Snail,
the Middlesex Law Association’s monthly newsletter.
The Ontario Divisional Court’s decision in T. Films S.A.. v. Cinemavault Releasing International Inc., 2016 ONSC 404 [1] is a reminder that “judgment proofing” is susceptible to attack under the statutory oppression remedy.[2]
Films S.A. involved a situation where T. Films S.A. retained Cinemavault Releasing International Inc. (“CRI”) to act as exclusive distributor of one of its motion pictures. The sales agency agreement, giving rise to this exclusive distributorship arrangement, contained a revenue sharing formula which required CRI to remit to T. Films S.A. a certain amount of the revenue derived by CRI’s distribution efforts. The distributorship arrangement between the parties began in 2006 and ended in 2011, when CRI ceased carrying on business.
Films S. A. claimed that CRI failed to remit the full amount of the revenues to which it was entitled under the distributorship agreement. In early 2012, T. Films S.A. commenced arbitration proceedings against CRI which resulted in an arbitral award being made in favour of T. Films S.A. In May of 2013, T. Films S.A. commenced court proceedings to enforce the arbitral award against CRI. These court proceedings included claims for, among other things, an oppression remedy against certain companies related to CRI and their common director and officer.
The basis of the oppression remedy claim was that on or about September 1, 2011, CRI restructured its business such that it ceased operations and was left without any assets. In particular, the restructuring involved related companies stepping in to collect CRI’s accounts receivable, being its only material asset, and replacing it as sales agent for another related company. In short, the restructuring resulted in T. Films S.A. being unable to collect its arbitral award as CRI had become judgment proof.
There was no dispute that the CRI business had been transferred for no consideration. More importantly, the directing mind of CRI and its related companies on cross examination refused to offer a specific purpose for the restructuring. As such, the court held that there was no bona fide business purpose for the restructuring and thus that its purpose was to defeat CRI’s claim. The restructuring was found to constitute oppressive conduct and the directing mind and related companies were held to be liable for the arbitral award made against CRI.
The court in T. Films S.A. did not devote any analysis to describing the minimum requirements for when “judgment proofing” crosses the line into oppressive territory. The answer may lie in the definition of “complainant” as only a “complainant” qualifies for judicial relief under the statutory oppression remedy.
A complainant is defined as a current or former registered holder of security in a corporation, and security is defined to include a registered debt obligation, a current or former director or officer, and any other “proper person” in the “discretion of the court”. Trade and judgment creditors (like T. Films S.A.), or any corporate stakeholder for that matter, will qualify as a “proper person”:
…if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectations of the applicant arising from circumstances in which the applicant’s relationship with the corporation arose.[3]
The threshold for when “judgment proofing” crosses into oppressive territory is therefore when the judgment proofing is inconsistent with a reasonable expectation created in the complainant arising from the circumstances of the complainant’s relationship with the other party.
This was illustrated in the case of Bulls Eye Steakhouse.[4] In that case, the court found a tenant to be a complainant where the tenant obtained partial summary judgment against its landlord and, before damages could be assessed, the landlord sold its plaza, being its only asset, and used the net proceeds to pay amounts owing to its sole shareholder. The court noted that typically a contingent creditor cannot reasonably expect a defendant corporation will be operated simply for the contingent creditor’s benefit in the event the contingent creditor becomes a judgment creditor. However, in this case the tenant had a reasonable expectation of payment of any judgment from a sale of the plaza. This reasonable expectation had been created because previously the tenant brought a failed motion to appoint a receiver over the plaza and in the context of that proceeding the landlord had filed affidavit material giving rise to a reasonable expectation that net funds from a sale of the plaza would be available to satisfy any judgment obtained. As such, having found a reasonable expectation that the plaza would be available to satisfy any judgment awarded, the court held that the sale of the plaza and payment of the net sale proceeds to the sole shareholder crossed the “judgment proofing” line.
It is instructive to note that the Supreme Court of Canada has said that the following factors are to be considered in determining the existence of reasonable expectations to be protected by the court:
General commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders.[5]
In conclusion, “judgment proofing” ventures into oppressive territory where a reasonable expectation, that an opposing party will not engage in “judgment proofing”, is breached.
Angelo C. D’Ascanio
[1] T. Films S.A.. v. Cinemavault Releasing International Inc., 2016 ONSC 404.
[2] See: Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, as amended, section 248; and Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, section 241.
[3] First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 60 Alta. L.R. (2d) 122 (Q.B.) at 152.
[4] 1413910 Ontario Inc. (c.o.b. Bulls Eye Steakhouse & Grill) v. McLennan (2008), 53 B.L.R. (4th) 115 (Ont. S.C.J.), additional reasons (2008), 53 B.L.R. (4th) 125 (Ont. S.C.J.), aff’d (2009), 309 D.L.R. (4th) 756 (Ont. C. A.)
[5] BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560 at para. 72.
Court Holds 45 Day Lien Period Can Be Met Despite Subcontractor Not Being on Site For More than 45 Days Due to Scheduled Winter Shut Down.
What happens to a subcontractor’s 45 day lien rights when the work on site is interrupted due to a scheduled winter shut down? This is the issue Mr. Justice DiTomaso decided on July 9, 2016, in Toronto Zenith Contracting Limited v. Fermar Paving Limited, 2016 ONSC 4696.
The facts were straightforward. Fermar was the general contractor on a major road construction project. It subcontracted some of the work to Zenith. The subcontract contemplated three winter shutdowns with Zenith thereafter returning to the site to recommence its subcontract work. Zenith started its work in 2013. The project went through the first winter shutdown. Zenith recommenced its work and worked on site until December 19, 2014, at which time the second winter shutdown began. During the second winter shut down, Zenith performed offsite work intended to become part of the improvement of the Project, in that it prepared and submitted shop drawings, and certain materials were fabricated and picked up by Fermar in February 2015 for the site. Furthermore, Zenith’s temporary shoring system was left in place on site during the winter shut down period and Zenith’s concrete forms installed before the winter shut down were used by Fermar to pour concrete after the winter shut down.
As a result of a dispute over delays and payment, Zenith issued a notice of termination of subcontract on February 6, 2015, and registered a construction lien on March 18, 2015.
Fermar contest the timeliness of registration of the lien, on the basis that the last day of work on the site was December 19, 2015, and, as such, Zenith registered its lien outside the 45 day lien period.
Mr. Justice DiTomaso rejected Fermar’s position and held that Zenith’s lien was registered within 45 days of “the date on which the person last supplied services or materials to the improvement”. In particular, Mr. Justice DiTomaso accepted Zenith’s contention that:
…Fermar’s submission regarding the timeliness of Toronto Zenith’s lien makes no practical or commercial sense. It would require parties to register claims for liens within 45 days of the date of their last supply of material or labour whenever a construction project was shut down for a significant period of time (whether it by weather, stop work order, scheduling issues or coordination requirements) even though the contractor, subcontractor or material supplier knew that there was ongoing progressive work or substantial quantities of material to be supplied or delivered as required at a later date.
His Honour ultimately concluded that Zenith’s lien had not expired, and was for a lienable supply of services and materials, given that the subcontract contemplated scheduled winter shutdowns, and the extent of offsite activity being performed during the winter shutdown for the Project.
The practical effect of this decision is that a contractor’s lien rights will be kept alive during a scheduled shut down that is longer than 45 days if the contractor continues to perform off site services for the Project during that shut down. The more interesting question is what will the Court say about a contractor’s lien rights if the nature of the Project is that no off site work is required during the scheduled shut down.
The Ontario Court of Appeal’s recent decision in MEDIchair LP reminds me of how difficult it can be for a lawyer to answer the question: Do you think this noncompetition agreement is enforceable?
In Medichair LP, the litigating parties were the franchisee and the franchisor. The franchisee wanted to resile from of a restrictive covenant in the Franchise Agreement, which provided that when the Franchise Agreement terminated the franchisee would not operate a similar store for 18 months within a 30 mile radius of its store or the nearest franchise store.
The Court identified the promotion of free and open trade and freedom of the right to contract as being the underlying, and competing, policy factors to be balanced in determining whether a restrictive covenant is valid.
The Court referenced the well-known legal test that for a restrictive covenant to be enforceable it had to be “reasonable”. In particular, the Court accepted that the “test for reasonableness is whether the clause is ‘limited’, as to its term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted”.
The words italicized by the Court are key, they set the terms of reference for whether the restrictive covenant being reviewed is reasonable in terms of its duration, geographic scope, and breadth of activities to be curtailed. A restrictive covenant is not reasonable, and will be struck down, if it is too long in duration, or the geographic area and activities it covers are to broad in scope, based on what is necessary to protect the legitimate interests of the beneficiary of the prohibition.
The reasonableness analysis, therefore, may be considered to be a two-step process. First, the legitimate interests of the beneficiary, to be protected, need to be identified. Second, these are to be compared to the restrictive covenant to determine if it is “overkill”.
The facts in Medichair LP, provided an interesting factual twist on the usual analysis as to whether the duration and scope of a restrictive covenant is reasonable. This is because the franchisor had no intention of opening/operating another franchise store in the protected location—as the franchisor’s corporate parent owned another chain of competing franchises and it already had one of these other stores in the protected area.
As such, the Court overturned the judge and held that the restrictive covenant was not enforceable as the franchisor did not have any legitimate or proprietary interest to protect within the geographic area covered by the restrictive covenant.
The Court confirmed that legitimate interests to be protected are those in existence at the time the contract is made, including what might possibly happen in the future. The Court referenced one of its 1982 decisions in support of this proposition.
In that earlier case, the Court upheld a restrictive covenant that covered all of Canada even though the business to be protected did not operate Canada wide, on the basis that at the time the contract was signed the reasonable expectation of the parties was that the business would be expanded across Canada even though that never happened. The Court in MEDIchair LP reasoned that if the reasonable expectations of the parties at the time of contract covered expansion, then they also covered the reasonable expectation of continued operations by the franchisor in the protected territory—and with that reasonable expectation not materializing the restrictive covenant became unnecessary to protect a commercial interest.
The Court does not explain the basis for arriving at this reasonable expectation at the time of contract—i.e., that the restrictive covenant was premised on the reasonable expectation that the franchisor would continue to operate a franchise in the protected area. It seems that it may also have been fair to infer, in a commercial setting, a reasonable expectation at the time of contract that the franchisor would want to protect its general brand or goodwill by restricting competition in a certain area whether or not another store would be opened in that area.
Enforceability of restrictive covenants continues to be one of those “grey areas” of the law that lawyers will continue to struggle with.
On January 6, 2016, the Ontario Court of Appeal released its decision in Schnier v. Canada (Attorney General), addressing the question of whether a bankrupt’s personal income tax debt under appeal constitutes “personal income tax debt” as that phrase is used in the Bankruptcy and Insolvency Act (“BIA”).
Does the Court’s decision create a situation where personal income tax debt under appeal unwittingly “survives” and is to be “carved out” of the bankruptcy or proposal process?
The facts in Schnier were straightforward. The bankrupt/tax debtor (ironically, a tax lawyer) had unpaid income tax assessments totalling approximately $4.478 million. Approximately $4.424 million of this amount was subject to outstanding appeals filed in the Tax Court of Canada. If the full assessed amount was considered to be part of the bankrupt’s personal income tax debt, then s.172.1 of the BIA would apply; but if the appealed amounts were excluded, then s. 172.1 would not apply.
The significance of s.172.1 is that special rules apply for a discharge from bankruptcy where a bankrupt has $200,000 or more in “personal income tax debt” and whose “personal income tax debt” represents 75% or more of the bankrupt’s total unsecured claims. Most notably, an absolute order of discharge is not available on a discharge hearing in those circumstances.
The registrar held that the amount of the bankrupt’s tax debt under appeal did not constitute part of the bankrupt’s “personal income tax debt” and, therefore, s.172.1 did not apply. The registrar discharged the bankrupt conditional on his remitting the balance of his surplus income payments, up to a maximum of $10,000. The Attorney General appealed to a judge. The judge upheld the registrar’s decision and dismissed the appeal. The Attorney General appealed to the Ontario Court of Appeal. The Court of Appeal upheld the decisions of the registrar and the judge and dismissed the appeal.
It is noted that the Attorney General did not seek to set aside the conditional order of discharge. Rather, the Attorney General was only concerned with and objected to the finding that the tax debt under appeal did not form part of the “personal income tax debt” of the bankrupt under s.172.1.
The following are some points that the Court of Appeal made in rendering its decision:
- A CRA proof of claim in respect of personal tax debt under appeal is a contingent claim. Accordingly, it is not a claim provable in bankruptcy until the appeal is resolved;
- For the purpose of applying for a discharge hearing, any CRA claim for personal tax debt under appeal will not form part of the “personal income tax debt” of the bankrupt for the purpose of s.172.1. As such, the regular discharge hearing provisions apply; and,
- CRA’s claim for personal tax debt under appeal will remain a contingent claim, and will not be a provable claim, at the bankrupt’s discharge hearing if the tax appeal has not been resolved by that time. The Court of Appeal noted that the Attorney General could have requested an adjournment of the discharge hearing in order to first dispose of the tax appeal, which then would change the nature of its claim from contingent to provable prior to the bankrupt’s discharge hearing.
Here is the wrinkle in the case. Prior to bankruptcy, Mr. Schnier had agreed with CRA to be bound by lead test cases that were before the Tax Court. These lead cases were dismissed on January 7, 2014; however, CRA did not take steps to formally dismiss Mr. Schnier’s Tax Court appeal until August 18, 2014, one month after the discharge decision on July 18, 2014. Thus, Mr. Schnier’s Tax Court appeal was technically outstanding and pending at the time of the discharge hearing, meaning (again, technically) that that part of the tax debt that was under appeal remained a contingent or unprovable claim. To quote from the Court’s decision:
[73] For the reasons set out above, I conclude that both the motion judge and the Registrar were correct in concluding that until the Tax Court of Canada disposed of Mr. Schnier’s appeals of the CRA’s assessments, the CRA’s claim in the bankruptcy for the assessed amount under appeal was a contingent one which the trustee could refuse to admit as a proven claim. Consequently, the motion judge and the Registrar correctly concluded that s. 172.1 of the BIA did not apply to Mr. Schnier’s discharge hearing.
If Mr.Schnier’s personal tax debt under appeal was a contingent and unprovable claim, then if follows that his liability for this personal tax debt is not released by his discharge from bankruptcy. This is because s. 178(2) of the BIA provides that a discharge from bankruptcy only releases the bankrupt from all claims provable in bankruptcy.
Does this all mean that Mr. Schnier has continuing liability for his personal income tax debt, which was contingent and unprovable at the date of his discharge but which became liquidated and provable thereafter when his Tax Court appeal was dismissed?
The bottom line seems to be that a tax debtor has to admit, or agree with CRA to a quantification of, any personal tax debt under appeal if the intention is to compromise and settle that personal income tax debt in a bankruptcy (or proposal) proceeding.